Flat and happy? Forecast for West Michigan manufacturing eases as economic cycle matures

After driving the West Michigan economy for several years, the manufacturing sector has reached a holding pattern of flat growth that has economists on the lookout for the next downturn in the business cycle.

In general, economists in the region note that weaker-than-expected sales of passenger vehicles in the automotive industry have resulted in the flattening of the manufacturing sector, while depressed energy prices continue to hold down the boom-and-bust oil and gas industry.

“Really what we’ve been looking at overall in West Michigan is over the last 18 months, the different measures we have of manufacturing have been cycling down,” said Paul Isely, associate dean at the Seidman College of Business at Grand Valley State University. “Individual months can come up, but overall we’re seeing it cycle down.”

JPMorgan’s global manufacturing Purchasing Managers Index (PMI) declined to 50.0 in May from 50.1 in April, signaling that the manufacturing sector has leveled off for the time being, according to reports.

A similar sentiment has played out locally as West Michigan manufacturers reported a drawdown in new orders and production, according to the recent Current Business Trends report published by Brian Long, director of supply management research at GVSU.

Long’s index of new orders flattened in May while the production index also weakened, although it still showed signs of slow growth.

“A lot of companies are thinning up inventories, especially ahead of the election, because of uncertainty,” Isely said. “If we start to see that type of drawdown continue, it will affect orders in the short run.”

While Isely remains “neutral” on his outlook for the West Michigan manufacturing economy, he cited a handful of headwinds that manufacturers are likely to encounter going forward.

Primarily, West Michigan manufacturers focused on international markets will most likely see exports decline as uncertainty in the global market continues to mount and the U.S. dollar strengthens through the year, Isely said.

“Right now, we’re really looking at what has been a strength in West Michigan over the last five years, which has been exports, really being a drag on the manufacturing sector in West Michigan this year,” Isely said.

That loss of exports could take up to $1 billion out of the West Michigan economy in 2016, he said.

In addition to an uncertain international market, manufacturers are still contending with a constrained labor pool as they seek to attract and retain workers, said Jim Robey, director of regional economic planning services at the W.E. Upjohn Institute for Employment Research in Kalamazoo.

Despite an overall softening in the manufacturing sector, Robey believes it also has some remaining tailwinds. Commodity prices continue to be relatively low and those prices that are going up — such as for oil — could result in an uptick for the oil and gas industry.

“I think it’s really a set of mixed signals that we’re seeing out there,” Robey said. “I think it’s difficult to have a divining rod at this point.”

Still, manufacturers remain uncertain over the severity of the next downturn and when it may occur.

“Essentially by the time we get to the middle of 2017, the probability of a recession grows every quarter after that point,” Isely said. “If you look at economists, the bulk are looking at sometime in 2018 or 2019 — the probabilities start to get pretty high. (But) that’s looking pretty far out for an economist, so take that with whatever grain of salt you want.”

AUTOMOTIVE

While economists attributed Michigan’s economic recovery, in part, to the revitalization of the automotive industry, most of them now point to the sector as a key factor in the state’s industrial stagnation.

“We’ve topped out on the automotive end and that’s flat-topped or trending lower, particularly in some of the low-level manufacturing areas,” GVSU’s Paul Isely said. “We’re seeing that automotive piece lighten up. It certainly isn’t creating growth, but it isn’t creating a drag yet.”

While firms differ on their outlook for the automotive industry, IHS Automotive Group LLC estimates U.S. light vehicle production to reach 18.2 million units this year and 18.4 million units in 2017. Meanwhile, U.S. light vehicle sales are expected to reach 17.8 million units in 2016 and peak at 18.2 million units next year before tapering off.

“By and large, the suppliers I’m talking to are all very busy,” said Mike Wall, director of automotive analysis at IHS in Grand Rapids. “I don’t want to convey the wrong message in terms of there being this production fall-off, but there is a little more potential for some volatility for the back half of the year if we don’t see sales start to accelerate a bit further.”

Overall, Wall remains optimistic about the automotive industry, particularly as automakers experience a resurgence in truck and crossover sales, which help to pad profit margins and continue to drive production, including for many West Michigan suppliers.

“We’re entering into the slower growth mode, and when you do that, little things can tweak the system here and there and certainly can impact volumes,” Wall said. “It’s been proceeding how we’ve expected it to, just with a little more weakness in the first part of the year than what our original expectations were.”

AEROSPACE

While the automotive industry may begin to take a bit of a back seat in the coming years, the aerospace sector is expected to continue its growth trajectory for firms in West Michigan.

Experts predict the commercial aerospace and defense sector to expand 4 percent in 2016, driven primarily by an uptick in new programs, said Gavin Brown, executive director of the Michigan Aerospace Manufacturers Association.

Programs such as the new Boeing 777 and Airbus A320 are providing long-term contracts for West Michigan manufacturers on the commercial side, while orders for the F-35 and F-18 continue to keep those manufacturers in the defense industry busy as well.

“These programs are going to be stalwarts for decades to come, and Michigan manufacturers will be supplying those parts, components and sub-assemblies at a growing rate, year end after year end,” Brown said.

The state has also taken an active role in the aerospace industry through its new Protect and Grow program, which it launched during the annual Mackinac Policy Conference in early June. The new program aims to expand the state’s defense industry, which includes aerospace manufacturers.

“What you’re finding is both in the process of manufacturing as well as component parts and assemblies, Michigan is driving that economic wave for the industry itself,” Brown said. “While we’ve always been automotive-centric, the growth in aerospace is actually growing in-line with the automotive wave we’re enjoying, too.”

OFFICE FURNITURE

Meanwhile, activity among West Michigan office furniture manufacturers is expected to continue at a steady, yet moderate pace through 2017.

Currently, office furniture production is expected to reach $10.3 billion in 2016, up modestly from $10.25 billion last year, according to the most recent data from the Business and Institutional Furniture Manufacturers Association (BIFMA). Production is expected to increase nearly 5 percent next year to $10.8 billion.

An updated industry forecast from BIFMA is expected shortly after this report goes to press.

Meanwhile, financial analysts expect Zeeland-based Herman Miller Inc. (Nasdaq: MLHR) to end its 2016 fiscal year with revenues of $2.25 billion, up from the $2.14 billion in revenue the company generated in its 2015 fiscal year, according to Yahoo Finance. Likewise, Grand Rapids-based Steelcase Inc. (NYSE: SCS) is expected to increase its annual revenues to $3.13 billion in its current 2017 fiscal year, a slight increase from the $3.1 billion it generated in its 2016 fiscal year.

“In general, in the here and now, the prospects should be good for these guys based on what we’re seeing early on in the value chain,” said Kathryn Thompson, CEO of Nashville, Tenn.-based Thompson Research Group, which covers the office furniture industry.

However, some industry insiders see new orders in the office furniture sector tempering slightly.

“We caution a bit that the office furniture market has been slowing the last few quarters. And our recent orders, while up, are a bit slower,” said Robert Schneider, chairman and CEO of Kimball International Inc., in a May conference call with analysts.

The Jasper, Ind.-based Kimball (Nasdaq: KBAL) generated $150 million in sales in its third quarter ending March 31, a 3-percent increase from the $145 million in sales the company reported during the same period in the previous year. Kimball’s strong sales were driven primarily by a 60-percent spike in its health care segment.

While office furniture manufacturers are doing well in North America in general, most companies have met some headwinds overseas when it comes to negative currency translations and other uncertainties, Thompson said.

“The Middle East is a hot mess, you can’t compete in China (and) Europe is a mixed bag,” she said.